The Beijing Games were the calm before the storm

Crude oil prices are moving just like they did in 2008: rallying, dipping, rallying, then dipping again.
Photo: Nic Walker

by
Stephen Wyatt

Four years ago the Beijing Olympics, starting on August 8, 2008, marked a period of peace for global markets. But once the Games ended, all hell broke loose.

Commodity markets crashed. The widely followed Jeffrey Reuters CRB Index of US commodity futures markets halved from August 29, 2008 through to February 2009.

Global equity markets similarly crashed. The US S&P 500 also halved. It fell from 1300 in August 2008 to near 650 in March 2009.

Will the London Olympics similarly be a time of market calm before an almighty storm? Will London be the prelude to devastating market collapse?

Ominously, the price patterns of 2008 are being replicated today. So far this year, copper and crude oil prices are moving just like they did in 2008: rallying, dipping, rallying, then dipping again as they search for some new equilibrium reflecting a new economic reality.

Related Quotes

Company Profile

The new economic reality that was taking shape in mid-2008 reflected excessive indebtedness, deleveraging and surging unemployment – the antithesis of the pre-2008 economic dream.

Synchronised global economic growth came to a sudden, screeching halt.

Yet during the Beijing Olympics in 2008, just as China’s export sector began to unwind with the eventual loss of 20 million migrant worker jobs, Chinese policymakers were brushing this off as simply an Olympics slowdown effect.

It was of course just the start of accelerating global recession.

Right now, markets are resilient. Copper rallied last week back to more than $US3.44 a pound. Oil is back over $US90 a barrel. These markets are running great races; their resilience is extraordinarily impressive – they deserve gold.

The markets, or at least the big investment funds in these markets, despite a bevy of awful news, perceive the current weakness as transitory, just as Beijing policymakers did in 2008.

The investment community is buoyed by a belief that central banks and governments can bail them out.

They can’t. That’s been tried and that was when policy had some serious grunt behind it. Trillions of dollars have been thrown at the recession. Interest rates are near zero. The policy arsenal is empty.

So are we headed for another 2008-like collapse?

The great dissimilarity between today and 2008 is that current economic conditions – highlighted by indebtedness, unemployment, recession and policy paralysis – are well known.

There was shock and panic after the Beijing Olympics. This was driven partly by Lehman Brothers’ collapse in September 2008.

Bank failures today are very possible, if not very likely. Just look at the wild flight of capital from Spain and Greece. But they would not shock today as they did in 2008.

And commodity markets have fallen from their 2008 highs by about 35 per cent. There has been some price adjustment to the new economic reality. The same cannot be said for US equities: they are higher today than during the Beijing Olympics, but that’s another story.

Global economic fundamentals hardly point to a commodity rally, but equally they do not point to collapse. Looking forward, though some headline events could seriously rock commodity markets.

The first is whether, later this year, China will enjoy a seamless transition of power – its greatest power shift for decades.

It has been complicated by a trial for murder of Gu Kailai, the wife of charismatic Bo Xilai, the former powerful party secretary of massive city Chongqing. The party is out to destroy Bo.

The consensus view is this power transition will be smooth, but only once in China’s post-1949 history has there been a peaceful transition.

China is the only remaining support for commodities. If China is destabilised, say goodbye to high commodity prices, the high Aussie dollar and a strong economy.

The second issue is the US presidential election and the march towards a possible “fiscal cliff". The US is set to implement mandatory spending cuts in January next year and, unless there is political agreement and intervention, end the Bush tax cuts.

The third is austerity in Europe that will crush any green shoots of growth. This is forecast by the slide in global PMIs.

The fourth is a possible break-up of the euro zone.

And lastly, it is a stretch of the imagination to believe that the spike in Australia’s terms of trade can hold at historically high levels. They never have before.

Sadly, Australia’s terms of trade, just like global commodity markets, are a boom-bust story.